IMF Urges China To Raise Rates More

The International Monetary Fund has warned China about the dangers of over-investment in sectors such as construction and property and recommended further monetary tightening following the small rise in interest rates imposed by the central bank last week:

Wanda Tseng, deputy director of the IMF’s Asia and Pacific department, praised the Chinese authorities for reacting “relatively early” to the problem but described the rate increases – which included a rise of 27 basis points to 5.85 per cent for the one-year benchmark rate – as “very small” and “probably just symbolic”.


The IMF report forecasts Asia-Pacific economic growth of 7 per cent this year. That would be the same as in 2005 but higher than the 6 per cent predicted by the previous report in August last year, partly because of the recovery of Japan and a continuing surge in international demand for electronic products made in Asia.

However, the IMF warned of several risks to Asian economies, including the effect of high oil prices, which have so far had only a moderate impact on the region. The report also said Asian financial markets would probably be “tested” as global liquidity conditions tighten.

Other dangers included a possible avian influenza pandemic among humans and the chance of a sharp slowdown in US demand caused by a disorderly unwinding of global current account imbalances. Although Asian domestic demand has improved, Ms Tseng warned: “Asia is still very dependent on external demand in the advanced countries.”

Current account surpluses are already diminishing in most Asian countries, in part because of higher oil import bills and the transfer of the surpluses to oil exporters. In India and east Asia, excluding Japan and China, the aggregate surplus is expected to fall to less than 3 per cent of gross domestic product this year, about half the level of 2004.

But in China, the IMF said, the current account surplus was likely to remain at 7 per cent of GDP this year after more than doubling in 2005. While rejecting calls from US politicians for a dramatic 20-50 per cent one-off revaluation of the renminbi, IMF officials such as Ms Tseng are urging Beijing to use its new exchange rate system more “flexibly”. In current conditions, that would mean allowing a faster appreciation of the renminbi against the US dollar.

The report, which covers the Asia-Pacific from India to New Zealand, could fuel concerns about the competitiveness of some south-east Asian economies.

Although foreign direct investment there has been sustained by manufacturers’ desire to avoid over-dependence on China, investors are more concerned even than they were before the 1997 financial crisis about corporate governance, corruption and political stability.